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Stop dependence on the government programs and place some of your money with large, solvent, insurance companies.

For the next couple of minutes I want you to imagine that you live in a utopian society with no debt, no crime, free health insurance, a hands-off government and guaranteed pensions. I would also like you to imagine that you have been sent by your utopian leaders to a planet called Earth.

Your final destination is the United States of America. Your sole mission is to conduct an unbiased analysis of their current pension model and Social Security program, and to report back to your society with your findings.

Here is what you discover:

The crisis in pension funds is much worse than you can imagine. Currently, U.S. pension funds are underfunded by at least $1 trillion. Underfunded refers to the difference between the promises made and the money set aside to meet those promises.

However, the actual amount by which pension funds are underfunded is grossly underestimated. The margin of error may be a few trillion dollars.

Why, you ask? You find out that pension funds currently are expected to earn 8 percent return. The problem with that is that almost half of pension funds are invested in safe bonds earning approximately 3 percent (what the 10 year Treasury bond pays now). If half of your money is earning 3 percent, what return does the other half need to average the 8 percent our leaders are counting on? The answer is 13 percent.

You also discover the ratio of workers to pensioners (the support ratio) is declining each year in the United States. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate compared to the previous generation of baby boomers. Increased life expectancy (with fixed retirement age) increases the number of retirees at any time, since individuals are retired for a longer fraction of their lives, while decreases in the fertility rate decrease the number of workers.

Baby boomer numbers

There are 10,000 baby boomers turning 65 every single day. That trend will continue for the next 19 years in the U.S.

Social Security

In 1950, there were 7.2 people aged 20–64 for every person 65 or over in the the U.S. By 1970, the support ratio dropped to 5.3, and by 2010 it was 4.5. It is projected to reach 2.6 by 2050.

The 2011 annual report by the program's Board of Trustees noted the following: In 2010, 54 million people were receiving Social Security benefits, while 157 million people were paying into the fund. Of those receiving benefits, 44 million were receiving retirement benefits and 10 million were receiving disability benefits.
In 2011, there will be 56 million beneficiaries and 158 million workers supporting them. In 2010 total income was $781.1 billion and expenditures were $712.5 billion, which left a total net increase in assets of $68.6 billion. Assets in 2010 were $2.6 trillion, an amount that is expected to be adequate to cover the next 10 years.

In 2023, total income and interest earned on assets are projected to no longer cover expenditures for Social Security as demographic shifts burden the system. By 2035, the ratio of potential retirees to working age persons will be 37 percent — i.e., there will be less than three potential income earners for every retiree in the population.

At the current rate, the trust fund will be exhausted by 2036 without legislative action.

In 2010, Social Security dispersed more money than it brought in through Social Security taxes.

You finally make it home to report back to your utopian society with the following conclusions:

1) U.S. citizens would be crazy to bank on Social Security for their retirement income. It just doesn't have the necessary money. They created a government run program that resembles a ponzi scheme where you pay money into a fund each year, people at the top of the age chain take money out, and you hope and pray that there will money left over by time you reach the top.

2) They shouldn't bank on their other state pension plans, either. One must assume they’re underfunded too and inevitably won’t be able to fulfill their promises.

3) Finally, as a U.S. taxpayer, they should get ready to pick up the tab in the form of higher taxes for the already-promised pension benefits.

What do you suggest as an alternative?

Stop dependence on the government programs and place some of your money with large, solvent, insurance companies.

They have products called fixed indexed annuities, which have lifetime income riders and benefits that emulate pensions by providing lifetime income. They enable the owner to defer taxes regardless of how high taxes rise in the intermediary. Moreover, they provide more flexibility in regards to when you need income, death benefits for your beneficiaries, and the ability to turn income on or off.

About the Author

Joe Simonds is the Digital Marketing Maverick for financial advisors and insurance agents. He is the original founder of Annuity Think Tank, Annuity123, and Retirement Income Network, and he currently consults financial advisors on digital marketing practices with his company Advisor Internet Ma... More